DPMN Bulletin: Volume X, Number 2, April 2003
Economic Development and the Role of
the State in Botswana
Prof. Gervase S. Maipose
Botswana is widely known for its remarkable economic growth and prudent macro-economic management. In fact the country "has had the highest level of per-capita growth of any country in the world in the last 35 years" (Acemoglu, Johnson and Robinson 2001). Analysts who are acquainted with this successful development record attribute the country’s "performance" more to effective state management than to "diamonds fortune", the main engine of growth (Harvey and Lewis 1990; Tordoff 1993; Leith 2000). In contrast, "development crisis in many African countries is compounded by an often profound weakness in the capacity of the state to promote development" (Brautigam 1996, 81). However, the institutional context of rapid growth in Botswana - that is a multiparty democratic system of government - offers a sharp and refreshing contrast to authoritative/undemocratic regimes elsewhere in China and the East Asian miracle which did not have a history of democratic systems of government in the first place until quite recently.
The most striking negative aspect is that, unlike other success stories, such as those in Asia and Mauritius in Africa, a story of good governance and long period of sustained rapid economic growth in Botswana has not translated itself into a significant degree of socio-economic transformation as reflected both in the country’s over-dependency on one mineral, diamonds, and high unemployment/poverty levels. To compound the situation Botswana, like all the countries in the sub-region, suffers from one of the highest rates of HIV/AIDS infection in the world, with signs of adverse impact already being felt in achievements in human resource development and general economic growth. Thus, Botswana faces a major policy challenge of turning the country’s wealth into meaningful economic diversification for sustainable and broad-based development.
This article highlights the main policy and institution related factors that explain sustained rapid economic growth with limited structural transformation. It also illuminates the extent to which the role and sheer size of the public sector, which for a long time had been a catalyst for growth and development, appear to have turned out to constitute part of the obstacles to growth and sustainable economic diversification – the main challenges facing the country. The crucial question is: what explains sustained rapid economic growth with limited economic diversification and unemployment/poverty alleviation, and what else does the Botswana state need to do?
The Role of the State: Continuity and Change
Managing the public sector and the required policy choices to facilitate broad-based sustainable economic growth and diversification hinges on one of the most topical issues in development literature – the role of the state in socio-economic development and how this is associated with failure and success stories. "Failure of the state perspective" that has loomed for almost two decades now since the 1980s and increasingly cutting across the World Bank and IMF perspective - known as the "Washington consensus" - contends that Africa’s development crisis is first and foremost a crisis of the African state capacity, or a failure of governance (Hyden 1983; World Bank 1989; Lipumba 1994; Brautigam 1996). The evidence is enormous, persuasive and need not be reviewed. But there are a few recognised exceptions, such as Mauritius and indeed Botswana, the later the focus of this article.
The overview of Botswana’s development record and the role of the state may be captured in one sentence – endorsing a general consensus among the country’s development analysts. Initially based on agriculture and heavily dependent on foreign aid, rapid economic growth and general development in Botswana have been propelled by the mining sector, particularly the diamonds industry, and have been strategically led and managed by the state and decreasingly complemented by foreign aid within the overall institutional context of a liberal market economy and multi-party democratic system of government. In examining this observation, it must also be noted immediately that the strategy of "state-led development" was not born out of "ideological dogma", but pragmatism in line with the informed economic opinion and preferred strategy when Botswana and many African countries became independent in the 1960s and 1970s. The same strategy was adopted by many developing (African) countries irrespective of their political regimes – civilian or military – and it did not matter whether a particular regime pursued a capitalist or socialist development strategy (Tordoff 1993, 121-147). The general lack of indigenous entrepreneurs or the absence of a viable private sector led some influential development economists of the time to provide further justification for a more interventionist state role in development. The point is that the idea of "state-led" development and national economic planning has worked relatively well in Botswana. The same strategy is associated with, and it is now blamed for, the general economic crisis in many African countries most of which were under authoritative/one-party regimes until quite recently.
However, following the dominance of "neo-liberalism dogma" and the collapse of many centrally planned economies, the emphasis on the role of the state in development has currently shifted towards attacking the development theories of the 1950s and 1960s as well as introducing a new style, the argument of "government failure" and the need for a minimalist and facilitative role for the state to leave sufficient space for "market-based" socio-economic development (Huntington 1994). Many aid donors began to demand political and economic liberalisation reforms as conditions for giving aid. Partly in line with the new school of thought on the role of the state in development process, and mainly out of the internal review of the old development strategy that increasingly yielded reduced returns from early 1990s, Botswana has also been re-orienting the overall strategy from "state-led" to "private sector-led" development, complemented with some public sector reforms. It is necessary to reflect on the factors, which accounted for Botswana as a successful developmental state so far: policies and/ or institutional factors that are still regarded as necessary fundamentals with which to confront the major challenge of socio-economic transformation.
Significance of Existing State Management Elements
The explanation for Botswana’s "success story" and the outlook for the country’s future prosperity tend to oscillate between emphasis on the "good luck" factors, on the one hand, and the "good management", on the other hand. It must be added that the two factors – "good luck" and "good management" – are inter-related, but independently constituted, though achievements owed more to careful or "good management" than "good fortune" which the Botswana state exploited to national advantage (Harvey and Lewis 1990, 6-7; Tordoff 1993, 282).
The elements in the good luck factor are basically four, though a detailed survey could reveal some other complementary issues. These are: i) the national mineral endowment, particularly diamonds; ii) the production and marketing of diamonds within the most durable and successful producer/marketing cartel run by De Beers, the Central Selling Organisation (CSO); iii) inflow/impact of foreign aid; iv) and small and largely homogenous population (with relatively large Tswana speaking) at least in the sense that ‘tribalism’ and ‘sectionalism’ are not sharply used to explain electoral behaviour and leadership competition in Botswana.
The inflow of foreign direct investment (FDI) remained quite stable for a long time between the 1970s and1990s. That it played a significant role in Botswana’s development effort is not an aspect of good luck, but one of the examples of good management – attracted by good policies and market-friendly environment. The same argument applies to the inflow of foreign aid and its sustainability long after Botswana became a middle-income country. Many donors were happy with the use of their aid and they wanted to be associated with the country’s success story (Maipose and Somolekae 1996). One can also appreciate the advantages of "small country effect" in key macro-economic indicators, and frustrations regarding broad or agriculture-based poverty reduction strategies due to recurrent drought conditions that make agriculture a precarious undertaking. Institutionalisation of multi-party political system and good macro-economic management contained various interests, thereby managing not just the country’s wealth but also the diversity of its people. Thus, the context of the "good natural fortune" is crucial.
The elements in the Good Management factor are many and basically different, though inter-related, illustrating the significance of policy choices and institutional capacity. These are: development planning and its integration with the annual budgetary process; institutionalisation of the liberal multi-party democracy and economic setting; prudent macro-economic management; and high state extractive and saving capacities. It is one thing to have "good fortune" or receive windfall foreign aid resources, and it is another thing to put one’s fortune to good use and to build and sustain the confidence of foreign investors.
Public Sector Development Planning and its integration with the annual budgetary process have been the foundation of Botswana’s development management machinery, and the basis for managing its windfall gains – mineral rent and foreign aid (Stevens 1981; Maipose and Somolekae 1996). The country relies on a six-year planning cycle, with mid-term reviews and annual budgets to update the plans in response to changes in the economic and political context. National Development Plans are essentially plans for public spending and human resource use, and annual budgets are used as instruments for converting a development plan into a programme for action, on the basis of the projections underlying the Botswana macro-economic model (Jefferis 1998). For effective aid management and co-ordination, the donors are asked to support (and have flexibility to choose) projects that are already identified as national priorities in the plan.
Good governance record, underlined by relatively well-institutionalised private property values, multi-party political system and the quality of the country’s political leadership, is another important factor which explains good management. Striving to enhance this form of institutional development was and continues to be crucial for better and more accountable government, which maintains freedom of speech, press and association, and respect for property rights, rule-based governance and independent Judiciary. A participatory and transparent political system has combined with the good and disciplined political leadership to moderate/limit, the incidence of corruption. Relying on the Transparency International Corruption Perception Index, Botswana has, for many years, been ranked among the least corrupt countries in the world and the best in Africa. Although there are cases of corruption and probably it is increasing (Good 1994), there are also cases of suicides (for fear of obvious consequences), resignations or dismissals (on matters of principle/accountability) and imprisonment involving politicians and government officers. Many analysts and the Batswana themselves acknowledge the exemplary ethical leadership and general foundation made by the country’s first President, Sir Seretse Khama, by establishing a precedent for high ethnical standards, a strong and relatively independent but accountable merit-based career civil service, and a developmental orientation of government (Tordoff 1993, 281). It must be emphasised that these attributes have been carried on and built upon by his successors
The degree of state extractive and saving capacities, which the Botswana state has displayed, due to good policy choices including negotiating skills and leadership vision and their implication for state capacity to budget, has been incredible. State extractive capacity, as defined by Brautigam (1996, 83) "is a measure of the ability of a government to raise the revenue it needs to pay for the expenses of implementing its policies and goals", and it is analytically seen as one of the four dimensions of state capacity – regulatory, administrative/managerial and technical. Some development analysts regard this as the most important element of the state capacity, mainly because "a capacity to budget is a capacity to govern"(Schick 1989) and also because financing capacity can be used to increase other forms of state capacity. Available evidence from the World Bank publications (1990-2000) – Development Indicators – clearly show that the country’s overall extractive capacity has been quite impressive by regional and international standard. During the period 1980 to 1998, government revenue (excluding grants), as a percentage of GDP, averaged about 50 % in the 1980s – reaching the peak of 64% in 1988 and had the lowest flows of 42% in 1993 (World Bank 1999). State extractive capacity in Botswana is impressively high mainly because the state is a share-holder in the key industries – known as an aspect of smart partnership – and all the main sources of government revenue, such as mineral/diamonds rent, customs revenue, aid and earning on reserves/savings, accrue to the treasury in lump forms, and without hard toil. This is partly explained by good policy choices, negotiating skills and vision on the part of the country’s leadership – covering how partnership/shares in the mining companies and sharing of custom revenue from the Southern African Customs Union (SACU) and continued flow of foreign aid were negotiated for, and so are policy choices regarding public sector savings and investment.
Another point is that unlike most other African countries, aid represents a small portion of Botswana’s national budget and is hardly significant in other key macro-economic variables. Financial aid as a percentage of public capital expenditure has come down from near 100 % in the 1960s (Stevens 1981) to 15% in 1992, and represents about 5% of total government revenue in the recent statistics (Maipose and Somolekae 1996). Moreover, foreign debt, which represents just about 8% of GNP, remains manageable, and almost insignificant in the sense that the debt service ratio is about 3% of export earning. Finally, a significant proportion of public revenue in the form of annual budget surpluses and the foreign exchange reserves have been saved – used as offshore investment or savings abroad (Jefferis 1998, 38), thereby making Botswana a net exporter of capital. Income from the country’s offshore investment/savings now constitutes the second or third major source of government income
Prudent macro-economic management, including complementary balance between monetary and fiscal policies for ensuring macro-economic stability, for which Botswana has acquired a good reputation, has been indisputably crucial for the country’s success (Harvey and Lewis 1990; Hill and Knight 1999). Dimensions of sound economic management that have been highlighted elsewhere need not be repeated here. Strikingly, for mineral-based economic growth, the government has been able to maximise the domestic benefits of its mining development, increase its domestic savings and investment, and strived to diversify (rather than suppress) the non-mining economy, while at the same time mitigating the potentially adverse effects of mineral-led development syndrome – effectively avoiding what is known as Dutch Diseased.
The government’s self-imposed adoption of orthodox stabilisation and adjustment policies is viewed as illustrative of strategic state intervention, and this is in sharp contrast to "forced structural adjustment reforms" in some other African countries. Because of good policies and consistent market-friendly environment, FDI came to play a significant role in many industries early in Botswana’s development effort, and in partnership with the government, they developed the mining sector – providing the resources critical for the first phase of economic diversification from agriculture to include mining. In terms of qualitative impact, early inflows of FDI strongly boosted export receipts and government revenues, which were invested wisely and created the foundation for long-term growth, and the government still continues to enjoy a reputation for the quality of bureaucracy and the non-distortive economic policy.
New Development Strategy: Achievements, Challenges and Prospects
Usually good at anticipating opportunities and problems, the government acknowledged in early the 1990s that the country’s success prospects had come to a stage where it had to use a different development strategy to confront a new set of more complex development challenges if its strong development record was to continue. Consequently, the government embarked on public sector reform process aimed at changing the development strategy from state-led to private sector-led development through various forms of privatisation, complemented by a more extensive use of Performance-based (contract) Management Systems (MFDP 1997). Results have been mixed with some clear achievements and prospects, generally underlined by limited structural socio-economic transformation. The main good news is that economic growth has picked up, progressively especially since the country’s NDP 8 was effected in 1997 and growth rate has averaged 6% per year with noticeable increase in non-traditional exports and some degree of structural economic diversification (Harvey 1998; MFDP 2000). Structural diversification seems to be promising for the tourism and financial services sectors, which have doubled their GDP shares from 1988/89 to 2001/2002. The mining GDP share has declined from about 50% (or rather 49.3% to be specific) to its present level of 32.5% for the same period. Prospects for manufacturing sector, whose GDP share of 4% has remained more or less the same since independence, cannot be ruled out yet. The sector’s main setback was in 1999 when the country’s main automobile assembly plant – the Motor Company of Botswana that assembled Hyundai vehicles – was closed following the liquidation of the motor company, the Wheels of Africa Group of South Africa. Except for the cattle sub-sector, the contribution of the agriculture sector to GDP has continued to decline mainly due to arid climatic conditions and relatively low investment. These conditions make agriculture and (consequently) broad-based rural development strategy a precarious undertaking.
One of the most important aspects of concern is the GDP share and growth of the public sector. Despite the Botswana government’s strong private sector thrust, it still retains a strong presence in the economy and has continued to expand – illustrated by recent state acquired shares in the newly built shopping malls in Gaborone, creation of three new ministries, and new parastatal agencies to facilitate economic diversification as elaborated upon below. While there are good reasons for retaining government involvement in areas such as diamond mining – the country’s key assert – there are areas where it may now make sense to step back. Unlike other African countries, Botswana has not been under the same financial stress and/or pressures of mismanagement associated with public enterprises to make this move, probably on appreciation of the fact that the number of state-owned enterprises and the size of the sector did not grow excessively in Botswana or accounting for about 6 per cent of GDP (Jefferis 1996). However, taking the public sector as a whole – the civil service and the state-owned public enterprises – there is a belief that the public sector is over-staffed and has outgrown its capacity for effective policy implementation and monitoring of projects (BIDPA 2000, 4; 14-19). The delay in privatising corporations may have already been costly – seen as one of the reasons for drastic reduction in FDI inflows, much of which are currently directed into other SADC countries through privatisation, which Botswana has not yet implemented.
Unfortunately, reviews of the country’s progress and prospects show that the structural transformation of the economy has not proceeded well – certainly not at the pace that the country would wish to have as it looks to the future. The fact is that Botswana is still at the factor-driven stage of economic development, highly dependent on vulnerable primary products for growth. The shrinkage of agriculture in favor of mining – not manufacturing – is not regarded as a sustainable development path in literature. The development of a mineral "staple" such as diamond export in Botswana has been thought of as a potential springboard for structural transformation – not via expansion of the mineral factor itself but via its linkages to the rest of the economy. The rest of the economy has been very weak except through foreign exchange earning (made available to other sectors) and fiscal linkages that have been very strong. Like many other African countries, Botswana is a mono-economy, heavily dependent on one mineral, diamonds, that is indirectly linked to other sectors of the economy through direct contribution to export earning and strong fiscal linkages. Mining is not a big employer and unemployment is estimated at nearly twenty percent – a disappointing situation in view of the country’s small population of 1.7 million. With about 45% of Batswana living below the poverty line – close to the African average of 50% – Botswana exemplifies the huge income differentials elsewhere on the continent. Gini co-efficient is said to be 0.56 and it has hardly been reduced for the past two decades.
Furthermore, there are still too few indigenous private entrepreneurs picking up business opportunities. Development of indigenous business class, like income poverty reduction, has been modest, at best. Batswana talk about government being rich in partnership with foreign interests and this is underlined by a strong feeling among the country’s elite that indigenous business people have not participated fully enough in Botswana’s "economic miracle", leading to the debates on "citizen empowerment" and the need for "growth with income poverty reduction." Like the rest of Africa, globalisation seems to be taking Botswana by storm. Local business fears that apart from marginalising Botswana in global terms, globalisation will make affirmative action for local business more difficult. It is against this background that one can understand why privatisation, which is not donor-driven in Botswana, has proceeded slowly, and ordinary citizens have reservations against privatisation due to perceived job losses.
Thus, against a story of good governance, regular elections, clean administration and prudent management, there is a major challenge of diversifying the economy, turning wealth into jobs or economic activities that will have effects of alleviating unemployment and poverty levels, and empowering indigenous private entrepreneurs. The major challenge of meaningful economic diversification, that is, export-led diversification, has to be achieved through energised/activated state facilitating role aimed at making the private sector dominant in the economy. This calls for a committed willingness of the state to have a private sector play a dominant role in economic development. Redefined in terms of experience of the Newly industrialised countries of Asia (NICs), the new role of the state in Botswana should be similar to that of the Singapore state – or what Yu (1997) calls the entrepreneurial state – which combines both the facilitative and interventionist role in the economy in a more creative and innovative manner.
The Botswana state has so far been interventionist but not sufficiently facilitative beyond providing a business friendly and enabling environment for the private sector. State entrepreneurship, spearheaded through the role of BDC, is complemented by some form of state facilitation of private agencies that is being done by the newly recreated parastatal organisations, such as Botswana Export Development and Investment Authority (BEDIA) and Trade and Investment Promotion Agency (TIPA). This is being illustrated in exploring for opportunities in world markets and identifying strategic industries that has potential for future growth and aiding the private sector to exploit them, and also working to "create" comparative advantage where the country did not initially have it, such as the recent state efforts in exploiting the tourism and financial services sectors. Some of the public sector reforms in this direction – focused on identified sectors or areas of new engine of growth – entailed splitting what used to be large ministries, creating three new ministries in total. For example, what used to be a Ministry of Local Government, Lands, Housing and Environment was split into two with local government standing on its own; so was the subsequent creation of the new Ministries of Science, Technology and Information; Trade, Wildlife and Tourism, and reconstituted Ministry of Industry and Commerce.
However, according to one of the main resolutions overwhelmingly adopted at the 7th National Business Conference that ended on 8th August 2002 in Francis town, government efforts to facilitate economic diversification and reduce direct role of the public sector have not been as aggressive and consistent as they should be. Having not retreated or rolled back yet its role in economic development, state created institutions to carry out the newly acquired mandates appear to have ended up enlarging further what is already a large public sector. Thus, for sustainable economic diversification to be realised under the country’s new development strategy of private sector led development there must be a willingness of the state to have the private sector play a dominant role. So far the message or policy design seems to be clear. According to the policy statement: "governance for market-based economic performance entails ‘right-sizing’ the public sector through selling of shares or asserts... and by a more extensive use of performance-based management contracts" (MFDP 1997, 86). But willingness and commitment have yet to be demonstrated by action/implementation.
The evidence seems to suggest that being mindful of basic economic fundamentals provides a good basis and investment-friendly environment, but it may not be enough for broad-based economic growth and diversification. The necessity of retaining a strong state that possesses a strategic development-oriented capacity for effective public service delivery and/or facilitating the role of the private sector in order to fulfil crucial development goals is asserted. This requires, in our view, forging ahead with management ideas that have served the country well so far, and resolute implementation of the public sector reforms that have been announced in line with the redefined role of the state, the facilitative role of the public sector in the economy.
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